What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-03 compared with 2021-05-07 · 157 added, 81 removed, 198 unchanged (55% of the section changed)

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As a result of these changes to our business, we have not provided a comparison of our financial condition, any changes to financial conditions and results of operations to prior periods in which we were operating as a registered investment company because it would not be useful to our shareholders.

The discussion herein is principally limited to our operations during the period following the SEC’s issuance of the deregistration order on January 5, 2021 to March 31, 2021.

The results of operations from January 1, 2021 through January 4, 2021 were not material to our condensed consolidated financial statements and have not been presented or discussed separately, but they are included in our results of operations for the three months ended March 31, 2021.

The discussion herein is principally limited to our operations during the period following the SEC’s issuance of the deregistration order on January 5, 2021 to June 30, 2021.

Under our new business strategy of originating and investing in first mortgage whole loans secured by middle market and transitional CRE, we define middle market CRE as commercial properties that have values up to $100,000 and transitional CRE as commercial properties subject to redevelopment or repositioning activities that are expected to increase the value of the properties.

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Under the Merger Agreement, the Exchange Ratio is fixed and will not be adjusted to reflect changes in the market price of our common shares or the TRMT Common Shares prior to the Effective Time.

Pursuant to the Merger Agreement, at the Effective Time, any unvested common share awards outstanding under TRMT's equity compensation plan generally will be converted into our unvested Common Share award under our equity compensation plan, subject to substantially similar vesting requirements and other terms and conditions, determined by multiplying the number of TRMT's unvested common shares subject to such award by the Exchange Ratio (rounded down to the nearest whole number).

Pursuant to the Merger Agreement, effective upon consummation of the Merger, our Declaration of Trust will be amended to, among other things, change our name to "Seven Hills Realty Capital” and provide our board of trustees authority to effect the conversion of us into a Maryland real estate investment trust without shareholder approval.

Pursuant to the Merger Agreement, at the Effective Time, any unvested common share awards outstanding under TRMT's equity compensation plan generally will be converted into unvested RMRM Common Share awards under our equity compensation plan, subject to substantially similar vesting requirements and other terms and conditions, determined by multiplying the number of TRMT's unvested common shares subject to such award by the Exchange Ratio (rounded down to the nearest whole number).

Pursuant to the Merger Agreement, effective upon consummation of the Merger, our Declaration of Trust will be amended to, among other things, change our name to "Seven Hills Realty Capital Trust” and provide our Board of Trustees authority to effect the conversion of us into a Maryland real estate investment trust without shareholder approval.

Following the consummation of the Merger, our common shares will continue to trade on Nasdaq under the new ticker symbol “SHRC”.

The completion of the Merger is subject to the satisfaction or waiver of various conditions, including, among other things:

(1) approval of the Merger and the other Transactions to which TRMT is a party by at least a majority of all the votes entitled to be cast by holders of its outstanding common shares at the special meeting of its shareholders held for that purpose;

(2) approval of the issuance of our Common Shares to be issued in the Merger, or the Merger Share Issuance, by at least a majority of all the votes cast by the holders of outstanding of our Common Shares entitled to vote at the special meeting of our shareholders at which a quorum is present and held for that purpose;

on September 17, 2021 for that purpose;

(2) approval of the Merger Share Issuance by at least a majority of all the votes cast by the holders of our outstanding Common Shares entitled to vote at the special meeting of our shareholders scheduled to be held on September 17, 2021 for that purpose;

(3) the absence of any law or order by any governmental authority prohibiting, making illegal, enjoining or otherwise restricting, preventing or prohibiting the consummation of the Merger and the other Transactions;

(4) the effectiveness of the registration statement on Form S-4, or the Form S-4, to be filed by us with the SEC to register our Common Shares to be issued in the Merger;

(4) the effectiveness of the Form S-4 filed by us with the SEC to register our Common Shares to be issued in the Merger;

(5) Nasdaq’s approval of the listing of our Common Shares to be issued in the Merger, subject to official notice of issuance;

and (6) the receipt of certain tax opinions from each party’s tax counsel.

The Merger is expected to close in the third quarter of 2021, and the Merger Agreement provides that either party may terminate the agreement if the Merger is not consummated by December 31, 2021.

The Merger is intended to qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as amended, and to provide a tax-free exchange for TRMT's shareholders for our Common Share consideration TRMT receives in the Merger, except that TRMT's shareholders generally may recognize gain or loss with respect to cash received in lieu of fractional shares of our Common Shares.

The Form S-4 was declared effective by the SEC on July 26, 2021.

The record date for determining the shareholders entitled to receive notice of, and to vote at, our and TRMT special meetings is July 14, 2021.

Pending approval by our and TRMT shareholders at the special meetings of shareholders scheduled to be held on September 17, 2021, the Merger is expected to close during the third quarter of 2021.

The Merger Agreement provides that either party may terminate the agreement if the Merger is not consummated by December 31, 2021.

The Merger is intended to qualify as a tax-free reorganization under the IRC and to provide a tax-free exchange for TRMT's shareholders for our Common Share consideration they receive in the Merger, except that TRMT's shareholders generally may recognize gain or loss with respect to cash received in lieu of fractional shares of our Common Shares.

The Merger Agreement contains certain customary representations, warranties and covenants, including, among others, covenants with respect to the conduct of our and TRMT’s respective businesses prior to closing, subject to certain consent rights by us and TRMT, respectively, and covenants prohibiting us and TRMT from soliciting, providing information or entering into discussions concerning TRMT competing proposals (generally defined as proposals for 20% or more of the assets, revenues or earnings or equity of the applicable party), subject to certain exceptions.

The Merger Agreement contains certain termination rights for both us and TRMT, including that under specified circumstances, either party is entitled to terminate the Merger Agreement to accept a superior proposal (generally defined as proposals for 75% or more of the assets, revenues or earnings or equity of such party, which proposal such party’s board of trustees (or an authorized committee thereof) has determined in good faith, after consultation with outside financial advisors and outside legal counsel, (1) would, if consummated, result in a transaction that is more favorable to the shareholders of such party from a financial point of view than the Merger and the other Transactions, (2) for which the third party has demonstrated that the financing for such superior proposal is fully committed or is reasonably likely to be obtained, and (3) which is reasonably likely to receive all required approvals from any governmental authority and otherwise reasonably likely to be consummated on the terms proposed);

provided that TRMT may only terminate the Merger Agreement after it has held a special meeting of its shareholders for the purpose of approving the Merger.

provided that TRMT may only terminate the Merger Agreement after it has held the special meeting of its shareholders scheduled to be held on September 17, 2021 for the purpose of approving the Merger.

Each party is required to pay the other party a termination fee of $2,156 plus the other party’s reasonable fees and expenses under certain circumstances related to such party’s change in recommendation, breach or termination in connection with a superior proposal.

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COVID-19 Pandemic

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, the United States declared a national emergency concerning this pandemic and several states and municipalities have declared public health emergencies.

We and our Manager are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including the ability of our borrowers to withstand the current economic conditions and continue to fund their debt service obligations owed and due to us and the status of our operations, liquidity and capital needs and resources.

We are also conducting financial modeling and sensitivity analyses regularly, actively communicating with our borrowers, our lender and other key constituents and stakeholders in order to help assess market conditions, opportunities, best practices and mitigate risks and potential adverse impacts, and continuously monitoring, with the assistance of counsel and other specialists, possible government relief funding sources and other programs that may be available to us or our borrowers to enable us and them to operate through the current economic conditions and enhance their ability to fund their debt service obligations owed and due to us.

economy has been growing as COVID-19 vaccinations are increasingly administered, commercial activities increasingly return to pre-pandemic practices and operations, and as a result of recent and expected future government spending on COVID-19 pandemic relief, infrastructure and other matters.

However, there remains uncertainty as to the ultimate duration and severity of COVID-19 pandemic on commercial activities, including risks that may arise from mutations or related strains of the virus, the ability to successfully administer vaccinations to a sufficient number of persons or attain immunity to the virus by natural or other means to achieve herd immunity, and the impact on the U.S.

The COVID-19 pandemic and the various governmental and market responses intended to contain and mitigate the spread of the virus and its detrimental public health impact have had a significant impact on the global economy, including the U.S.

Many of the restrictions that had been imposed in the United States during the pandemic have been lifted and commercial activity in the United States has increasingly returned to pre-pandemic practices and operations.

To date, the COVID-19 pandemic has not had a significant impact on our business.

There remains uncertainty as to the ultimate duration and severity of the COVID-19 pandemic, including risks that may arise from mutations or related strains of the virus, the ability to successfully administer vaccinations to a sufficient number of persons or attain immunity to the virus by natural or other means to achieve herd immunity, and the impact on the U.S.

economy that may result from the inability of other countries to administer vaccinations to their citizens or their citizens’ ability to otherwise achieve immunity to the virus.

There are extensive uncertainties surrounding the COVID-19 pandemic and its aftermath and, as a result, we are unable to determine what the ultimate impact will be on our borrowers’ and other stakeholders’ businesses, operations, financial results and financial position.

As a result, we are unable to determine what the ultimate impact will be on our borrowers’ and other stakeholders’ businesses, operations, financial results and financial position.

For further information and risks relating to the COVID-19 pandemic on us and our business, and the various actions our Manager has taken in response to the COVID-19 pandemic, see our "Summary of Principal Risk Factors" included in our Current Report on Form 8-K filed on March 24, 2021.

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The table below calculates our book value per common share:

March 31, 2021

June 30, 2021

Shareholders' equity $ 193,055

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Our Loan Portfolio

The table below details overall statistics for our loan portfolio as of March 31, 2021 and December 31, 2020:

As of March 31, 2021 (Successor Basis) As of December 31, 2020 (Predecessor Basis)

The table below details overall statistics for our loan portfolio as of June 30, 2021 and December 31, 2020:

As of June 30, 2021

(Successor Basis) As of December 31, 2020 (Predecessor Basis)

Number of loans 9 5

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$ 212,515 $ 92,863

Unamortized net deferred origination fees $ (1,405) $ (984)

Unamortized net deferred origination and exit fees $ (1,773) $ (984)

Carrying value $ 210,742 $ 91,879

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5.62 % 5.71 %

Weighted average LIBOR floor 0.76 % 0.78 %

Weighted average maximum maturity (years) (4)

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(1) Unfunded loan commitments are primarily used to finance property and building improvements and leasing capital and are generally funded over the term of the loan.

(2) The principal balance at March 31, 2021 includes $69 of capitalized interest that does not reduce the amount of unfunded loan commitments.

(2) The principal balance at June 30, 2021 includes $96 of capitalized interest that does not reduce the amount of unfunded loan commitments.

(3) All in yield represents the yield on a loan, excluding any repurchase debt funding applicable to the loan and including amortization of deferred fees over the initial term of the loan.

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Loan Portfolio Details

The table below details our loan portfolio as of March 31, 2021:

The table below details our loan portfolio as of June 30, 2021:

Location Property Type Origination Date Committed Principal Amount Principal

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Maximum Maturity (2)

First mortgage whole loans

First mortgage loans

Downers Grove, IL Office 09/25/2020 $ 30,000 $ 29,500 L + 4.25% L + 4.69% 11/25/2024 67 % 3

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Olmstead Falls, OH Multifamily 01/28/2021 54,575 44,615 L + 4.00% L + 4.65% 01/28/2026 63 % 3

Colorado Springs, CO Office / Industrial 04/06/2021 34,275 29,215 L + 4.50% L + 5.04% 04/06/2025 73 % 3

Londonderry, NH Industrial 04/06/2021 39,240 34,251 L + 4.00% L + 4.62% 04/06/2026 73 % 3

Total/weighted average $ 250,710 $ 212,515 L + 4.27% L + 4.91% 68 % 2.9

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(3) LTV represents the initial loan amount divided by the underwritten in-place value of the underlying collateral at closing.

As of March 31, 2021, we had $177,195 in aggregate loan commitments, consisting of a diverse portfolio, geographically and by property type, of 7 first mortgage whole loans.

As of June 30, 2021, we had $250,710 in aggregate loan commitments, consisting of a diverse portfolio, geographically and by property type, of nine first mortgage loans.

All of the loans in our portfolio are structured with risk mitigation mechanisms, such as cash flow sweeps or interest reserves, to help protect us against investment losses.

In addition, we continue to actively engage with our borrowers regarding their execution of the business plan for the underlying collateral, among other things.

As of April 30, 2021, all of our borrowers had paid all of their debt service obligations owed and due to us and none of the loans included in our investment portfolio were in default.

In April 2021, we originated a first mortgage whole loan of $34,275 to refinance an office/industrial property with 288,275 square feet located in Colorado Springs, Colorado.

This loan requires the borrower to pay interest at the floating rate of LIBOR plus a premium of 450 basis points per annum.

This floating rate loan includes an initial funding of $28,970 and a future funding allowance of $5,305 for tenant improvements, leasing commissions and capital expenditures and has a three year initial term with one one-year extension option, subject to the borrower meeting certain conditions.

Also in April 2021, we originated a first mortgage whole loan of $39,240 to finance the acquisition of two cold storage industrial buildings located in Londonderry, NH.

In addition, we continue to actively engage with our borrowers regarding their execution of the business plans for the underlying collateral, among other things.

As of July 30, 2021, all of our borrowers had paid all of their debt service obligations owed and due to us and none of the loans included in our investment portfolio were in default.

In July 2021, we originated a first mortgage loan of $27,385 which was used to refinance a multi-tenant office building located in Plano, TX.

This loan requires the borrower to pay interest at the floating rate of LIBOR plus a premium of 475 basis points per annum.

This floating rate loan includes an initial funding of $24,635 and a future funding allowance of $2,750 for tenant improvements, leasing commissions and capital expenditures and has a three-year initial term with two, one-year extension options, subject to the borrower meeting certain conditions.

We did not have any impaired loans, non-accrual loans or loans in default as of March 31, 2021;

Also in July 2021, we originated a first mortgage loan of $19,688 which was used to finance the acquisition of a 100-unit apartment building located in Portland, OR.

This loan requires the borrower to pay interest at the floating rate of LIBOR plus a premium of 357 basis points per annum.

This floating rate loan was fully funded at closing and has a three-year initial term with two, one-year extension options, subject to the borrower meeting certain conditions.

We did not have any impaired loans, non-accrual loans or loans in default as of June 30, 2021;

thus, we did not record a reserve for loan loss as of that date.

For further information regarding our risk rating policy, see Notes 3 and 5 to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

However, depending on the duration and severity of the COVID-19 pandemic and the current economic downturn, our borrowers' businesses, operations and liquidity may be materially adversely impacted.

However, depending on the duration and severity of the COVID-19 pandemic and any resulting economic downturn, our borrowers' businesses, operations and liquidity may be materially adversely impacted.

As a result, they may become unable to pay their debt service obligations owed and due to us, which may result in the impairment of those loans, and our recording loan loss reserves with respect to those loans and recording of any income with respect to those loans on a nonaccrual basis.

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On February 18, 2021, one of our wholly owned subsidiaries entered into our Master Repurchase Agreement with UBS.

As of March 31, 2021, we had no outstanding balance under our Master Repurchase Facility and, as of April 30, 2021, we had a $23,172 aggregate outstanding principal balance under our Master Repurchase Facility.

See Note 6 to the Notes to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS

As a result of the changes to our business, we have not provided a comparison of our financial statements to prior periods in which we were operating as a registered investment company because it would not be useful to our shareholders.

The discussion herein is principally limited to our operations during the period following the SEC's issuance of the deregistration order on January 5, 2021 to March 31, 2021.

For the three months ended March 31, 2021, our net income was $350, or $0.03 per share.

For further information regarding our Master Repurchase Agreement, see Note 6 to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

The table below is an overview of our Master Repurchase Facility, which provided financing for our loans held for investment, as of June 30, 2021:

June 30, 2021 Maturity Date Principal Balance Unused Capacity Maximum Facility Size (1)

Collateral Principal Balance

Master Repurchase Facility 02/18/2024 $ 49,172 $ 143,883 $ 193,055 $ — $ 212,515

(1) While the Master Repurchase Facility has no maximum facility amount, we expect the advancements under the Master Repurchase Facility to not exceed our equity, which is as of June 30, 2021 is $193,055.

The table below details our Master Repurchase Facility activities during the three months ended June 30, 2021:

Balance at March 31, 2021 $ —

Borrowings 49,172

Deferred fees (431)

Amortization of deferred fees 34

Balance at June 30, 2021 $ 48,775

The table below details our Master Repurchase Facility activities during the six months ended June 30, 2021:

Balance at December 31, 2020 $ —

Borrowings 49,172

Deferred fees (431)

Amortization of deferred fees 34

Balance at June 30, 2021 $ 48,775

As of June 30, 2021, outstanding advancements under our Master Repurchase Facility had a weighted average interest rate of LIBOR plus 205 basis points per annum, excluding associated fees and expenses.

As of June 30, 2021 and July 30, 2021, we had a $49,172 and a $69,172, respectively, aggregate outstanding principal balance under our Master Repurchase Facility.

As of June 30, 2021, we were in compliance with all covenants and other terms under our Master Repurchase Agreement and the Guaranty.

RESULTS OF OPERATIONS (dollars in thousands, except per share data)

As a result of the changes to our business, we have not provided a comparison of our financial statements to prior year periods in which we were operating as a registered investment company because it would not be useful to our shareholders.

We have provided a 2021 sequential quarter comparison which we believe may be useful to investors because we have operated as a mortgage REIT since January 5, 2021.

The discussion herein is principally limited to our operations during the period following the SEC's issuance of the deregistration order on January 5, 2021 to June 30, 2021.

Three Months Ended June 30, 2021 Compared to Three Months Ended March 31, 2021

Three Months Ended

June 30, 2021 March 31, 2021 Change % Change

INCOME FROM INVESTMENTS:

Interest income from investments $ 3,055 $ 2,001 $ 1,054 52.7 %

interest and related expenses (192) — (192) n/m

Income from investments, net 2,863 2,001 862 43.1 %

OTHER EXPENSES:

Base management fees 721 715 6 0.8 %

General and administrative expenses 714 592 122 20.6 %

Reimbursement of shared services expenses 275 326 (51) (15.6 %)

Total expenses 1,710 1,633 77 4.7 %

Income before income tax benefit (expense) 1,153 368 785 213.3 %

Income tax benefit (expense) 7 (18) 25 (138.9 %)

Net income $ 1,160 $ 350 $ 810 231.4 %

Weighted average common shares outstanding 10,208 10,202 6 0.1 %

Net income per common share $ 0.11 $ 0.03 $ 0.08 266.7 %

n/m - not meaningful

Interest income from investments .

The increase in interest income from investments was primarily the result of a full quarter of interest income from investments on two loan investments that were originated during the three months ended March 31, 2021 and the interest income from the origination of two loan investments during the three months ended June 30, 2021.

Interest and related expenses.

The increase in interest and related expenses was primarily the result of advances made to us under our Master Repurchase Facility during the three months ended June 30, 2021.

General and administrative expenses .

The increase in general and administrative expenses was primarily due to share-based compensation recognized as a result of trustee share grants awarded in May 2021, partially offset by a decrease in professional fees.

Reimbursement of shared services expenses.

Reimbursement of shared services expenses represents reimbursement of the costs for the services that our Manager arranges on our behalf from RMR LLC.

The decrease in reimbursement of shared services expenses was primarily the result of decreased usage of shared services from RMR LLC during the three months ended June 30, 2021.

Income tax benefit (expense).

Income tax expense represents income taxes paid or payable by us in certain jurisdictions where we are subject to state income taxes.

The increase in net income was due to the changes noted above.

Non-GAAP Financial Measures

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therefore, our reported Distributable Earnings may not be comparable to the distributable earnings as reported by other companies.

In order to maintain our qualification for taxation as a REIT, we are generally required to distribute substantially all of our taxable income, subject to certain adjustments, to our shareholders.

We intend to elect to be taxed as a REIT under the IRC, effective for our 2020 taxable year.

In order to qualify for taxation as a REIT, we are generally required to distribute substantially all of our taxable income, subject to certain adjustments, to our shareholders.

We believe that one of the factors that investors consider important in deciding whether to buy or sell securities of a REIT is its distribution rate.

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We believe that Distributable Earnings provides meaningful information to consider in addition to net income and cash flows from operating activities determined in accordance with GAAP.

This measure helps us to evaluate our performance excluding the effects of certain transactions, the variability of any management incentive fees that may be paid or payable and GAAP adjustments that we believe are not necessarily indicative of

our current loan portfolio and operations.

In addition, Distributable Earnings is used in determining the amount of base management and management incentive fees payable by us to our Manager under our management agreement.

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(b) depreciation and amortization, if any;

(d) unrealized gains, losses and other similar non-cash items that are included in net income for the period of the calculation (regardless of whether such items are included in or deducted from net income or in other comprehensive income under GAAP), if any;

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Distributable Earnings are reduced for realized losses on loan investments when amounts are deemed uncollectable.

For the three months ended March 31, 2021, Distributable Earnings was equal to net income.

Three Months Ended June 30, 2021 Six Months Ended June 30, 2021

Reconciliation of net income to Distributable Earnings:

Net income $ 1,160 1,510

Non-cash equity compensation expense 182 182

Distributable Earnings $ 1,342 $ 1,692

Weighted average common shares outstanding 10,208 10,205

Distributable Earnings per common share $ 0.13 $ 0.17

Factors Affecting Operating Results

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Our operating results are also impacted by general CRE market conditions and unanticipated defaults by our borrowers.

For further information regarding the risks

associated with our loan portfolio, see the risk factors identified in "Summary of Principal Risk Factors" included in our Current

Report on Form 8-K filed on March 24, 2021.

Credit Risk .

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We do not currently expect to hold any of our investments for trading purposes.

For further information regarding the risks associated with our loan portfolio, see the risk factors identified in "Summary of Principal Risk Factors" included in our Current Report on Form 8-K filed on March 24, 2021.

Availability of Leverage and Equity .

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Market Conditions.

Prior to the COVID-19 pandemic, CRE transaction volumes were increasing, driving demand for CRE loans, and alternative lenders, like us, had gained market share.

The outbreak of the COVID-19 pandemic in the first quarter of 2020 led to a sharp decline in economic activity over the first half of 2020.

The closing of non-essential businesses, "shelter-in-place" orders, restrictions on travel, cancellations of events and gatherings and limitations on building occupancies implemented to stop or slow the spread of the virus had a substantial negative impact on the CRE market.

Many property owners granted lease forbearance to tenants unable or, in some cases, unwilling to make rent payments which, in turn, increased the number of loan forbearance requests by the property owners.

In addition, volatility in the capital markets resulted in a substantial widening of credit spreads of commercial mortgage-backed securities, or CMBS, contributing to increased overall borrowing costs for banks and alternative lenders.

Uncertainty surrounding the depth and duration of the economic downturn

resulted in a severe decline in overall CRE transaction volume and margin calls imposed on lenders, as a result of increased borrowing costs and declining collateral values, contributed to a decline in new loan originations.

The CRE debt markets began to rebound in the third quarter of 2020.

In June 2020, the CMBS loan delinquency rate was near highs experienced in 2010, but has since steadily declined as defaults have been "cured" by borrowers investing additional capital to support their loans or through loan forbearance.

With historically low interest rates across much of the world, investors’ appetite for higher returns has resulted in improvement to the CMBS market.

CMBS credit spreads have declined such that newly issued AAA rated, investment grade bonds for conservatively underwritten loan pools with high quality collateral are currently expected to trade at credit spreads at or near those seen prior to the COVID-19 pandemic.

Lower rated tranches of CMBS bonds continue to trade with wider yields than prior to the COVID-19 pandemic;

however, overall volatility has subsided which we expect to positively impact the alternative lending market.

Further, uncertainty surrounding the depth and duration of the economic downturn resulted in a severe decline in overall CRE transaction volume, and the financial burdens resulting from margin calls imposed on lenders, as a result of increased borrowing costs and declining collateral values, and many lenders’ shift in focus to manage large volumes of forbearance requests from borrowers caused new loan originations to significantly decline.

The CRE debt markets began to rebound in the third quarter of 2020 and are continuing to stabilize.

CMBS credit spreads have declined such that newly issued AAA rated, investment grade bonds for conservatively underwritten loan pools with high quality collateral are trading at credit spreads less than those seen prior to the COVID-19 pandemic.

In addition, issuance of CRE collateralized loan obligations, or CLOs (financial instruments secured by a pool of loans and used by lenders as a source of funding), has increased while CLO credit spreads have declined, providing additional liquidity to alternative lenders, like us.

The decline in property transaction volume and increased liquidity available to lenders has caused greater competition to fund new loans.

While CRE transaction volume has improved recently, it has not returned to the average levels experienced prior to the COVID-19 pandemic.

The decline in property transaction volume and increased liquidity available to lenders has caused greater competition among lenders, including banks and alternative lenders, like us, to fund new loans.

We believe that this increased competition amongst lenders, along with significant declines in the LIBOR and U.S.

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However, despite the improvement of the securitization markets and the increase in lending activity, we believe challenges remain.

The hospitality and retail sectors are among those sectors that have been most negatively impacted by the economic downturn.

It is unclear how consumer and travel habits will be impacted over the long term during and after the COVID-19 pandemic;

if consumer and travel activity do not substantially rebound, we believe that this uncertainty will continue to burden these sectors and lenders with significant exposure to these property types will continue to face challenges.

The hospitality and retail sectors are among those that have been most negatively impacted by the economic downturn related to the COVID-19 pandemic.

However, with reduced restrictions and increased vaccination rates in the United States, retail sales and leisure travel have experienced improvement during the second quarter of 2021, while business travel remains at levels significantly lower than prior to the COVID-19 pandemic.

It is unclear how consumer and travel habits will be impacted

over the long term during and after the COVID-19 pandemic;

if consumer and travel activity does not substantially rebound, we believe that this uncertainty will continue to burden these sectors and lenders with significant exposure to these property types will continue to face challenges.

It is still unclear how the shift to flexible work-from-home schedules will impact the office sector and demand for office space going forward.

As such, lenders will continue to face underwriting challenges with respect to assumptions related to new leasing, tenant renewal probabilities and occupancy rates for office properties, especially assets located in downtown or central business district markets.

As vaccination rates increase and companies re-evaluate their work-from-home policies, there should be increased clarity on the demand for office properties.

Multifamily properties are expected to continue to be a preferred asset class by most lenders and investors for the near term due to the stability of cash flows and the liquidity available from government sponsored enterprises, such as Fannie Mae or Freddie Mac;

however, it is unclear what the impact of the U.S.

Centers for Disease Control and Prevention moratorium on tenant evictions will have on the sector and how rent collections will be impacted.

Lastly, industrial properties have performed well throughout the downturn and continue to benefit from the shift in consumers’ behavior to increased levels of e-commerce, which has accelerated during the COVID-19 pandemic.

Centers for Disease Control and Prevention moratorium on tenant evictions that expired on July 31, 2021 will have on the sector and how rent collections will be impacted.

Industrial properties continue to perform well and benefit from the shift in consumers’ behavior to increased levels of e-commerce, which accelerated during the COVID-19 pandemic.

Lastly, competition among lenders has caused alternative lenders, like us, to expand their loan portfolios to include certain asset types within these asset classes, such as data centers, manufactured housing, cold storage and self-storage, to achieve favorable yields on high quality properties that have been and may continue to be less susceptible to the impact of the COVID-19 pandemic.

The longer-term impact of the COVID-19 pandemic is still uncertain.

However, we believe that as the U.S.

economy improves and returns to a more stable state, there will be significant opportunities for alternative lenders, like us, to provide creative, flexible debt capital for a wide array of circumstances and business plans.

economy continues to improve and returns to a more stable state, there will be significant opportunities for alternative lenders, like us, to provide creative, flexible debt capital for a wide array of circumstances and business plans.

Changes in Market Interest Rates .

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LIBOR decreases are mitigated by interest rate floor provisions in our loan agreements with borrowers;

therefore, changes to income from investments, net, may not move proportionately with the decrease in LIBOR.

Based on our loan portfolio at March 31, 2021, LIBOR was 0.11% and would have to exceed the floor established by any of our loans, which currently range from 0.50% to 1.00%, for us to realize an increase in interest income.

therefore, changes to income from investments, net, may not move proportionately with the increase or decrease in LIBOR.

Based on our loan portfolio at June 30, 2021, LIBOR was 0.08% and would have to exceed the floor established by any of our loans, which currently range from 0.50% to 1.00%, for us to realize an increase in interest income.

LIBOR is currently expected to be phased out for new contracts by December 31, 2021 and for pre-existing contracts by June 30, 2023.

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A larger portfolio, however, may result in increased expenses;

for example, we may incur additional interest expense or other costs to finance our investments.

we may incur additional interest expense or other costs to finance our investments.

Also, if the aggregate principal balance of our loan portfolio grows but the number of our loans or the number of our borrowers does not grow, we could face increased risk by reason of the concentration of our investments.

LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands, except per share amounts)

LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands, except per share data)

Under the Merger Agreement, we have agreed to conduct our business in all material respects in the ordinary course of business consistent with past practice.

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The following is a summary of our sources and uses of cash flows for the period presented:

Three Months Ended

March 31, 2021

Six Months Ended June 30, 2021

Cash, cash equivalents and restricted cash at beginning of period $ 103,564

Net cash used in:

Net cash provided by (used in):

Operating activities (2,093)

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Cash, cash equivalents and restricted cash at end of period $ 30,607

During the three months ended March 31, 2021, our cash used in operating activities consisted of unfavorable changes in working capital.

During the three months ended March 31, 2021, our cash used in investing activities consisted of loan originations, net of deferred fees, and additional fundings on our loans held for investment.

During the three months ended March 31, 2021, our cash used in financing activities consisted of deferred financing cost payments related to our Master Repurchase Facility.

During the six months ended June 30, 2021, our cash used in operating activities consisted of unfavorable changes in working capital, including the payment of transaction costs related to the Merger of $2,270.

During the six months ended June 30, 2021, our cash used in investing activities consisted of loan originations and additional fundings on our loans held for investment.

During the six months ended June 30, 2021, our cash provided by financing activities consisted of proceeds from our Master Repurchase Facility, partially offset by deferred financing cost payments related to our Master Repurchase Facility and distributions to our common shareholders.

Distributions

On April 15, 2021, we declared a quarterly distribution of $0.15 per common share for the first quarter of 2021, or approximately $1,530, to shareholders of record on April 26, 2021.

We expect to pay this distribution on or about May 20, 2021.

During the six months ended June 30, 2021, we paid distributions to our common shareholders aggregating $1,530, or $0.15 per common share, using cash on hand.

For further information regarding distributions we paid during the six months ended June 30, 2021, see Note 6 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

On July 15, 2021, we declared a quarterly distribution of $0.15 per common share, or approximately $1,533 in aggregate, to shareholders of record on July 26, 2021.

We expect to pay this distribution on or about August 19, 2021.

Contractual Obligations and Commitments

Our contractual obligations and commitments as of March 31, 2021 were as follows:

Our contractual obligations and commitments as of June 30, 2021 were as follows:

Payment Due by Period

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$ 38,291 $ — $ 38,291 $ — $ —

Principal payments on Master Repurchase Facility (2)

49,172 — 49,172 — —

Interest payments (3)

2,701 1,067 1,634 — —

$ 90,164 $ 1,067 $ 89,097 $ — $ —

(1) The allocation of our unfunded loan commitments is based on the current loan maturity date to which the individuals commitments relate.

(2) The allocation of outstanding advancements under our Master Repurchase Facility is based on the current maturity date of each loan investment with respect to which the individual borrowing relates.

(3) Projected interest payments are attributable only to our debt service obligations at existing rates as of June 30, 2021 and are not intended to estimate future interest costs which may result from debt prepayments, additional borrowings, new debt issuances or changes in interest rates.

Off-Balance Sheet Arrangements

As of March 31, 2021, we had no off-balance sheet arrangements that have had or that we expect would be reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

As of June 30, 2021, we had no off-balance sheet arrangements that have had or that we expect would be reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Debt Covenants

On February 18, 2021, one of our wholly owned subsidiaries entered into our Master Repurchase Agreement with UBS.

As of March 31, 2021, we had no outstanding balances under, and believe we were in compliance with the terms of our Master Repurchase Facility.

For more information regarding our Master Repurchase Facility, see Note 6 to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Our principal debt obligations at June 30, 2021 were the outstanding balances under our Master Repurchase Facility.

Our Master Repurchase Agreement provides for acceleration of the date of repurchase of any then Purchased Assets and UBS’s liquidation of the Purchased Assets upon the occurrence and continuation of certain events of default, including a change of control of us, which includes our Manager ceasing to act as our sole manager or to be a wholly owned subsidiary of RMR LLC.

Our Master Repurchase Agreement also provides that upon the repurchase of any then Purchased Asset, we are required to pay UBS the outstanding purchase price of such Purchased Asset and accrued interest and any and all accrued and unpaid expenses of UBS relating to such Purchased Asset.

In connection with our Master Repurchase Agreement, we entered into the Guaranty, which requires us to guarantee 25% of the aggregate repurchase price, and 100% of losses in the event of certain bad acts as well any costs and expenses of UBS related to our Master Repurchase Agreement.

The Guaranty also requires us to comply with customary financial covenants, which include the maintenance of a minimum tangible net worth, minimum cash liquidity and a total indebtedness to stockholders' equity ratio.

As of June 30, 2021, we had a $49,172 aggregate outstanding principal balance under our Master Repurchase Facility.

Our Master Repurchase Agreement is structured with risk mitigation mechanisms, including a cash flow sweep, which would

allow UBS to control interest payments from our borrowers under our loans that are financed under our Master Repurchase Facility, and the ability to accelerate dates of repurchase and institute margin calls, which may require us to pay down balances associated with one or more of our loans that are financed under our Master Repurchase Facility.

As of June 30, 2021, we believe we were in compliance with all covenants and other terms under our Master Repurchase Agreement and, to date, UBS has not utilized any such risk mitigation mechanisms under our Master Repurchase Agreement.

Related Person Transactions

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For example, as noted earlier in this Quarterly Report on Form 10-Q, we entered into the Merger Agreement with TRMT pursuant to which we have agreed, on the terms and subject to the conditions set forth therein, to consummate the Merger and the other Transactions, subject to the satisfaction or waiver of certain conditions.

For further information about these and other such relationships and related person transactions, see Notes 1, 9 and 10 to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our Current Report on Form 8-K dated April 26, 2021, Proxy Statement for our 2021 Annual Meeting of Shareholders and our other filings with the SEC.

In addition, see the section captioned “Risk Factors” of this Quarterly Report on Form 10-Q or “Summary of Principal Risk Factors” included in our Current Report on Form 8-K filed on March 24, 2021 for a description of risks that may arise as a

result of these and other related person transactions and relationships.

In addition, see the section captioned “Risk Factors” of this Quarterly Report on Form 10-Q and “Summary of Principal Risk Factors” included in our Current Report on Form 8-K filed on March 24, 2021 for a description of risks that may arise as a result of these and other related person transactions and relationships.

We may engage in additional transactions with related persons, including businesses to which RMR LLC or its subsidiaries provide management services.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis